The imperative of joining global supply chains

Rapid growth

In 2017, Vietnam’s export value reached a record US$214 billion, a 21.2 percent increase compared with 2016. The export structure has shown positive changes, with industrial products accounting for a large percentage of goods and export markets diversified.

The number of export businesses has also increased, with some gaining regional and global reputations. The Vietnam Dairy Products Joint Stock Company (Vinamilk), for example, has become one of the top 300 businesses in Asia, having invested in 10 farms with 25,000 dairy cows, producing milk products meeting Global GAP standards. Vinamilk also creates organic products for domestic sale and export to discerning markets, such as the US and Japan.

Value chain participation

According to economist Pham Chi Lan, however, businesses like Vinamilk account for a small percentage of total Vietnamese firms. A 2017 World Bank (WB) report entitled “Vietnam at a crossroads: Engaging in the next generation of global value chains” noted that only 300 Vietnamese firms are strong enough to join supply chains, of which large-size companies account for a mere two percent, medium-size enterprises for 2-5 percent, and the remainder are micro and small businesses.

“Vietnamese businesses have joined various supply chains, but their participation remains at the final stage of industrial manufacturing that creates low added value. Notably, most Vietnamese participants in supply chains are major foreign invested companies, while domestic manufacturers account for a small percentage. Most stages that create high added value, such as design, spare parts and core structures manufacturing, are done outside Vietnam. Important services are usually provided by foreign firms,” Pham Chi Lan said.

She attributed the problems to a lack of linkages, among other elements. Most small and medium enterprises based in industrial parks have yet to build supply chains to reduce production costs and assist each other in manufacturing. Currently, foreign invested companies obtain a mere 26.6 percent of their input materials from Vietnam, part of them from other foreign invested enterprises.

According to Doan Anh Tuan, Founder and CEO of the Future Generation Company Limited, most Vietnamese businesses still lack strategic vision. “Domestic companies still pursue short-term benefits and concentrate on promoting quantitative growth rather than paying attention to building brands and global reputations. They know almost nothing about the distribution systems and consuming cultures, as well as the management of production and the laws of importing countries. Moreover, they are financially incapable of developing their own distribution channels and still lack international management skills,” he said.

Overall solution needed

Tran Dinh Toan, President of the Vietnam Export Support Association (VESA), believes Vietnamese businesses should be more active in building brands and long-term strategies to access the global market. In his opinion, businesses need to cooperate to seek outlets for their products and create new ones that can compete domestically and globally.

In the era of Industry 4.0, businesses must develop their markets through e-commerce websites. An e-commerce ecosystem should be created to connect manufacturers directly with consumers, replacing traditional trading chains and creating opportunities for Vietnamese small and medium enterprises.

To do this, in the opinion of Pham Chi Lan, domestic businesses need to concentrate on improving product quality and obtain international certifications. Some products of small and medium companies, such as Vi Que fish sauce made by TP Food Processing Inc and salted garden egg with shrimp sauce made by the Ngoc Lien Import, Export, Trading and Producing Co., Ltd, have been certified by the US Food and Drug Administration (FDA) and won consumer trust in export markets.

According to Doan Anh Tuan, the state needs to adopt an overall business support solution. Apart from mechanisms that offer special support in terms of tax and fees, long-term investment in education and training, especially in science and technology, is also needed. To create products with high added value independently, domestic businesses need to access modern technologies and advanced processes.

Do Van Long, Regional Chief Strategy Officer at Infinity Blockchain Labs (IBL), said block chain technology can provide consumers with clear information about the origin of export products. IBL is piloting this technology on 500 mangos, enabling consumers to use their smart phones to access a website providing information about places where the mangos were grown and how they were processed, as well as their taste and expiry dates. From now to year’s end, IBL will export products using this technology.